Risk Management Could Have Created More GameStop Millionaires

This article is the final of a three-part series about the recent GameStop saga. You can find the first article, “GameStop and the Short Squeeze” here, and the second on, “Short Selling Is a Vital Trading Activity” here. Today, we are talking about what would have happened if GameStop traders had practiced good risk management. 

risk management | trader who hit the jackpot

Every trader claims to follow rules. While some trading rules are sound philosophies and keep you grounded, only one is critical to your success: good risk management. Imagine if those GameStop (GME) buyers had not been driven by greed. There would be a lot more millionaires among the Wallstreetbets traders.

Yes, I do know that maintaining discipline when a hot trend appears is exceedingly difficult. The allure of risking capital to gain more wealth is tempting; at times, it’s hard to resist.

As we discussed a few weeks ago, the GameStop saga was a massive short squeeze driven by members of the sub-Reddit Wallstreetbets. They managed to drum up enthusiasm for this very low float (plenty of available shares) stock. Late in 2020, the stock was trading around $4 per share. It was cheap enough for people to buy hundreds, if not thousands, of shares without risking too much capital.

The very poor fundamentals of GameStop were well known, but that did not matter to this crowd. They wanted to make a statement – and did they ever! I read that some who held onto their shares were instant millionaires. That’s great! It’s the American Dream – risk some money and hit the jackpot.

Risk management could have created more GameStop millionaires

When dealt such a strong hand, many traders either freeze or become so overcome with greed that common sense is thrown out the window. Case in point: Missouri Man.

About a month ago, I heard the story of a man from Missouri who followed Wallstreetbets. He bought some shares of GameStop last year and then purchased some call options.

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